Fraud Prevention: Analysis of the Fraud Triangle
In Part I of my blog, “Does Your Organization Need to be Under a Fraud Watch?” I provided a diagram of the fraud triangle. We’ll revisit that triangle here to evaluate if you have all elements of the triangle present in your organization. Let’s begin with thinking about each leg of the triangle and questions you should consider in your evaluation to increase your fraud prevention tactics. Keep in mind the three legs of the fraud triangle: Opportunity, Pressure, and Rationalization.
1. Begin with Opportunity
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- Evaluate your key internal controls and those employees who are involved. Are the controls designed properly? How are controls being enforced and monitored? Do controls ever break down? If so, how, when, and what is the response when they do?
- Do you know your tone from the top? What is the tone/attitude of your management team and what is being communicated to staff? How do your employees feel about the environment of your organization? Does your organization have a method for reporting unethical behavior without fear of retaliation?
2. Evaluate Pressure
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- Does your organization set certain metrics or numerical goals/budget with increasingly more pressure to meet these goals/budgets? Do you have compensation and incentives connected with meeting these metrics? Establishing metrics/goals does not mean your employees are going to commit fraud, however, the degree of fear and pressure in achieving these targets can play a significant role in employees committing fraud.
- Outside of work, do you notice employees that appear to be living a lifestyle beyond their means? Has their behavior changed? Do they have family or health issues that can create a significant amount of pressure for them?
3. Evaluate Rationalization
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- This is a tougher one because you have to now think like a fraudster. I truly believe as human beings we want to see the best in others. So to think like a fraudster is challenging for most. Here are some basic rationalizations of fraudsters:
| “I don’t want to disappoint my supervisors/bosses” | “I’ll just pay off these debts and then I’ll stop” |
| “We are doing this so people can have their bonuses” | “No one will even notice” |
| “I need to do this for my family” | “I’ll pay it back” |
| “Everybody does this” | “It’s not a big deal” |
| “It’s outside my control, I don’t have a choice” | “They deserve it” |
| “You would do the same if you were me” | “They owe me this” |
| “It’s the auditor’s job to catch this” |
If you evaluate these three elements together and decide your organization should probably be under a fraud watch, then good! That means you’ve actually performed an analysis of the fraud triangle, recognized areas of exposure, and can now put together a plan to mitigate the risk. This is one step closer to fraud prevention. Fraud can happen to anyone by anyone, but the more educated you become on the three elements of the fraud triangle and implement measures to mitigate it, the stronger your organization will be.
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